Question
In: Finance
Comparing alternative offers Buying a coupon bond –In the primary market, new bond 5 years to...
- Comparing alternative offers
- Buying a coupon bond
–In the primary market, new bond
- 5 years to maturity; pays $800 per year
–Annual interest rate of 8%
- Principal value=face value=$10,000 (repaid at the maturity date)
–In the secondary market
- Pays $600 each year for 5 years and repays principal of $10,000 at the end of the fifth year
Solutions
Expert Solution
Price of primary market bond should be=10000 as yield to
maturity or rate is equal to coupon rate, price is equal to face
value
Price of secondary market bond should
be=600/8%*(1-1/1.05^5)+10000/1.08^5=8429.38572
If secondary market bond is available for less than 8429.39, buy secondary market bond else buy primary market bond
jeff jeffy answered 2 years agoRelated Solutions
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